We have written about the benefits of utilizing revocable trusts for incapacity planning, probate avoidance and out-of-state real estate. However, we often get the question from couples, “Why do we need two trusts? Why can’t we just have one joint trust?”
To be honest, in some instances, a joint revocable trust might be the appropriate option for a couple’s estate. When determining whether a joint revocable trust is advisable, the clients should encourage their various advisors – their tax, legal and financial professionals – to talk with one another to ensure that the option is truly best suited for the clients’ circumstances.
Joint Revocable Trusts
With a joint revocable trust, all of the clients’ necessary assets are retitled into one trust. Typically, both spouses are co-trustees of the trust, which requires the clients to act jointly and in agreement. Utilizing joint revocable trusts can complicate matters because it can be difficult to trace the origin of the assets within the joint revocable trust for determining the basis of assets and for potentially taxable estates. Joint revocable trusts seem to be used more often in community property states because there are already tax benefits built into their laws.
Separate Revocable Trusts
When using separate revocable trusts, an individual trust is established for each spouse and the appropriate assets are transferred into their respective trusts. With separate trusts, it is easier to balance out an estate between spouses for tax planning purposes by titling property accordingly. For example, if one spouse’s estate is largely comprised of significant qualified accounts, then it might be beneficial to title the home solely in the other spouse’s trust. With separate revocable trusts, each spouse retains independent control of his or her own assets within their trust, providing more flexibility if there is a disagreement between the spouses.
Scott Zucker, an attorney in Virginia, has a great two-part series on whether couples should use joint or separate trusts. Check out Part I and Part II.
Again, it is important to consult the appropriate advisors to determine whether a joint or separate revocable trust is right for you and your estate.
In my opinion, it doesn’t matter how well you’ve set up these trusts. If the person appointed to carry them out is incompetent or unethical, everything goes down the drain.
Great post.